Markets and the Environment: Friends or Foes?

Case Western Reserve Law Review
Fall 2004
Vol. 55:1

By Terry L. Anderson

If you take a course in environmental economics, you are likely to be dazzled with fancy graphs using isoquants, budget constraints, and even social welfare functions. From these fancy tools, F. Bator went so far as to determine a “bliss point,” suggesting that these tools could take society to its maximum level of well-being. I still have the book from which these graphs were taken and I can still remember distinctly sitting through this lecture and just thinking, can you believe it? I am going to learn how to take society to its bliss point!

This type of analysis illustrates the way economists often approach problems, namely using marginal analysis to maximize some value subject to opportunity cost constraints. From this analysis follows one of the main tenets of economics: if the marginal benefits are greater than the marginal cost, do it. We economists think this marginal analysis is a pretty powerful way of thinking about the world. In determining how clean the air should be, we need to know what the additional benefits of clean air are, what the additional costs of clean air are, and as long as the additional benefits exceed the additional cost then clean it up. If you want to know whether to save an endangered species, the answer is the same: if the marginal benefits exceed the marginal costs, save it.

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Terry Anderson is the William A. Dunn Distinguished Senior Fellow and former President of PERC as well as the John and Jean De Nault Senior Fellow at the Hoover Institution, Stanford University. He believes that market approaches can be both economically sound and environmentally sensitive. His research helped launch the idea of free market...
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